Arbitration Provisions for Cross Border Contracts

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Michael B. Tule
Director and Vice Chair, Corporate Department
Published: New Hampshire Bar News
November 21, 2018
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There are as many opinions on alternative dispute resolution and arbitration as there are lawyers, most of them strongly held.  As a general rule, I tend to favor judges and courts as the forum for deciding disputes and as a business lawyer the contracts I draft tend to reflect this bias.  There are exceptions to this preference, and the most compelling exception for me is the use of arbitration for international commercial contracts.  For the reasons stated below, all international commercial contracts should, as a matter of course, have a dispute resolution clause that includes an effective agreement to arbitrate.

Why Arbitrate?

Like litigation in courts, arbitration is expensive, time consuming, and distracting for clients. But for most international disputes, there is no satisfactory substitute. There are two major reasons for this. First, agreeing to arbitrate assures that your client’s dispute will be heard in a neutral forum, instead of the other party’s home court, where you may face a biased judge and an unfamiliar language. Second, with arbitration you have a far better chance at having a judgment or award enforced. Enforcing the judgment of a court (even a U.S. court) in another country isn’t a sure thing. International arbitration is different.  Under a multinational treaty known as the “New York Convention,” 142 signatory countries have agreed to recognize and enforce foreign arbitration awards. There is no comparable treaty governing the judgments of U.S. or foreign courts. Therefore, it is almost always to your client’s advantage to agree to arbitration when contracting with an overseas party, provided that each party is located in a country, or has assets in a country, which is a signatory to the New York Convention. If you are dealing with a party who is not located in a country that has signed the New York Convention, you must proceed with extreme caution and take additional measures to protect your client.

Arbitration Agreement Essentials

Most arbitration organizations provide simple, one paragraph provisions to insert in a contract committing the parties to binding arbitration.  While these provisions represent good starting points, I urge you to give the provision more than just passing thought. You must craft the arbitration clause to fit your client’s business objectives and accommodate the unique circumstances of your client’s particular deal. Poorly drafted arbitration clauses pose many dangers, and clever defendants can exploit an imprecise arbitration clause to delay or completely avoid arbitration.

With that in mind, there are several essentials of any well-drafted arbitration agreement. These essentials include defining the scope of the dispute, exclusivity, number of arbitrators, language of the arbitration (English, if at all possible), availability of equitable relief and applicable substantive law, among others. In addition, every arbitration clause should contain a provision referring to and incorporating the rules of a specific arbitration organization to govern the arbitration. There are perhaps a half dozen pre-eminent arbitration organizations in the world. They include the International Chamber of Commerce (“ICC”), the London Court of International Arbitration (“LCIA”), the International Centre for Dispute Resolution (“ICDR”), the Stockholm Chamber of Commerce (“SCC”) or the Singapore International Arbitration Centre (“SIAC”), among others. All of these organizations are reputable, but experienced lawyers often recommend using the ICC as the arbitration administrator in international disputes. It is generally believed that the ICC, although expensive, is the most widely recognized organization and has the best panel of arbitrators to choose from. In some situations, you may want to use an organization like the LCIA or the ICDR, which charge a fixed fee for the arbitration versus a percentage of the claim, like the ICC. It is possible to draft an “ad hoc” arbitration clause, which calls for the arbitration to be held privately between the parties, without the rules or administrative oversight of an arbitral organization, but this is generally not recommended.

One of the most important decisions to make is designating the place of arbitration.  Generally speaking, the parties should try to pick a place that is neutral. You should take care to choose a country that has a well-developed body of arbitration law and a modern arbitration statute.  The most reliable (and popular) places of arbitration are London, Paris, Geneva, Zurich, Stockholm, the Hague, New York, Los Angeles, Toronto, Rome, Brussels, and Singapore.  For U.S. clients, English speaking countries with common law courts are going to be most familiar, especially if the arbitrators refer a particular issue to the local courts as part of the arbitration, or a party attempts to bring an action outside the arbitration.   This is not uncommon in a high stakes international arbitration.

There are other provisions you may consider other than the essentials listed above. In deciding whether to include such provisions, you and your client should give a great deal of thought to whether such provisions are necessary and/or whether they may provide strategic advantage in the context of your deal. Examples of such other provisions include designating special qualifications of the arbitrators, nationality of the arbitrators, special discovery procedures, limitations on types of damages, deadlines and time limits, special summary disposition procedures, shifting costs and expenses to the losing party, and assessing costs to collect a judgment.

Conclusion

In every international commercial contract a carefully crafted arbitration clause is a necessary part of any process for resolving international disputes. Putting an effective and carefully drawn arbitration provision in the agreement will give your client the best chance of achieving a good result and enforcing an award should a dispute arise.